The factor affecting choice of Capital Structure is:
(A) Tax Rate
(B) Control
(C) Capital Structure of other Companies
(D) Operating Efficiency
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (B) and (C) only
(A) Tax Rate — A factor affecting the choice (Correct). Capital structure is the mix of debt and equity in a firm’s funds. Interest on debt is deducted before tax is charged, so a higher tax rate makes debt cheaper and favours borrowing.
(B) Control — A factor affecting the choice (Correct). Issuing more equity shares brings in new owners and can weaken the control of the existing ones. Debt does not dilute control.
(C) Capital Structure of other Companies — A factor affecting the choice (Correct). The debt-equity ratios of other firms in the same industry are a useful guide. A firm should not copy them blindly, but it does look at them.
(D) Operating Efficiency — Not a factor affecting the choice (Incorrect). It is not among the factors of capital structure. The factors close to it are cash flow position and return on investment.
NCERT (2026-27 Edition): “Factors affecting the Choice of Capital Structure … 6. Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. …” “11. Control: Debt normally does not cause a dilution of control. A public issue of equity may reduce the managements’ holding in the company and make it vulnerable to takeover. …” “14. Capital Structure of other Companies: A useful guideline in the capital structure planning is the debt-equity ratios of other companies in the same industry. …” |